Oil Imbalance Rattles Government Budgets

Andamento del mercato - 29/12/2015

Oil prices have fallen back towards multi-year lows following the rally after US crude oil inventories fell during the prior week’s reading, causing the prices to surge by about $2.00 a barrel before retreating after the weekly reopening.  Both Brent and West Texas Intermediate oil prices fell to over 3.00% by late Monday reaching prices of $36.41 and $36.59 respectively. Adding to demand concerns was the data showing the world’s fourth largest crude oil purchaser, Japan, saw oil sales drop to 46-year lows in November.  This comes amid a demographic shift marked by a shrinking population and unexpectedly warmer weather that has seen end demand shrink. Sales recorded by the Ministry of Economy, Trade and Industry for November showed a decline of -6.90%, equivalent to 3.04 million barrels per day from a year earlier. Meanwhile, from a supply standpoint, oil production from major exporters such as the United States, Russia, and the Organization of Petroleum Exporting Countries has risen to remarkable levels, keeping consistent pressure on crude prices.


The current imbalance between supply and demand could only worsen, especially with Iran planning to add an additional 500,000 barrels per day to the export market once sanctions are lifted.  Oil prices recorded near 11-year lows is drastically impacting producer nations, especially those heavily engaged in welfare spending. Russia in particular has increased oil production to about 10.8 million barrels a day in order to keep Government coffers filled and make up for the shortfall as oil prices continue to tumble.   Gross domestic product is already under pressure, with the economy on pace to contract over -4.00% this year alone. Saudi Arabia, faces similar challenges after recording a budget deficit of $97.90 billion for the fiscal year. This year's revenue amounted to just $162.19 billion, well below the target of $190.73 billion based on the slide in the energy complex.  Now that Iran intends to add to prevailing oversupply conditions alongside producers raising still raising output to close budget gaps, pressure on prices is unlikely to abate.

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